The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Rafael Portillo, Luis-Felipe Zanna, Stephen O'Connell, and Richard Peck
INTERNATIONAL MONETARY FUND
We introduce subsistence requirements in food consumption into a simple new-Keynesian
model with flexible food and sticky non-food prices. We study how the endogenous structural
transformation that results from subsistence affects the dynamics of the economy, the design of
monetary policy, and the properties of inflation at different levels of development. A calibrated
version of the model encompasses both rich and poor countries and broadly replicates the
properties of inflation across the development spectrum, including the dominant role played by
changes in the relative price of food in poor countries. We derive a welfare-based loss function
for the monetary authority and show that optimal policy calls for complete (in some cases nearcomplete)
stabilization of sticky-price non-food inflation, despite the presence of a foodsubsistence
threshold. Subsistence amplifies the welfare losses of policy mistakes, however,
raising the stakes for monetary policy at earlier stages of development.